AgDM newsletter article, July 1999

The farm economy downturn – looking at the numbers

Don Hofstrand William EdwardsDon Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu and William Edwards, extension economist, 515.294.6161, wedwards@iastate.edu

The farm economy has been in a slump for over a year. Farm record data from 1998 confirms this.  One of the best sources of this data is the Iowa Farm Business Association of over 2,000 commercial family farms in Iowa.  This information allows us to compare the economic situation in 1998 with that of previous years and to examine the effect of the downturn on specific types of farms.

Comparing 1998 with previous years

The economic and financial status of farms in 1998 is compared to their average status from 1995 through 1997 as shown in Table 1.

Table 1: Farm economic and financial data – past and present

1998

1995 – 97

Net income – cash accounting

$50,640

$45,412

Net income – accrual accounting

5,973

42,243

Crop inventory – gain or loss

-12,989

6,769

Avg. corn yield

150

129

Avg. corn sale price

$1.91

$2.56

Return on assets

- 2 %

7 %

Livestock returns per $100 feed fed

$120

$148

Value of farm production per $1 of expense

$1.08

$1.41


Net Income – Cash Accounting

Average cash net farm income in 1998 was $50,140 compared with $45,412 for the previous three years.  This would indicate that 1998 was a relatively prosperous year for farmers.  However, cash net income is computed by using the cash method of accounting where gross income is based on the value of crops and livestock sold during the year, rather than the value of what is produced.  When prices are low, farmers will sell more of their inventory in order to meet cash flow needs.  In some cases, USDA marketing loans were included in cash income as well. 

Net Income – Accrual Accounting

The accrual method is a more accurate estimate of computing net income.  With the accrual method, stored grain and livestock on hand at the beginning and end of the year are taking into account in computing net income.  The market value of inventory at the beginning of the year is subtracted from income while the value at the end of the year is added to income.  Because commodity prices in 1998 were substantially lower at the end of the year than at the beginning of the year, accrual net income was only $5,973 compared to an average of $42,243 from 1995-1997

These figures reflect just the income generated from the farming operation.  The average farm family received about $14,000 of additional income from sources off the farm.  However, family living expenditures for farm families averaged about $30,000 per year.

Other

Crop inventory is the change in the value of crops sold due to the difference between opening inventory and final sale price.  Normally this is a positive figure but in 1998 it was a negative $12,989.  Although the farms in 1998 had a higher corn yield than in previous years (150 bu. versus 129 bu.), the average corn sale price was only $1.91 in 1998 (compared to $2.56 average for the three previous years).  Return on assets was a negative 2 percent in 1998 compared to an average of 7 percent.  Only $1.08 of farm production was generated for each $1 of expense in 1998.  During the three previous years, $1.41 of farm production was generated for each $1 of expense.

Economic comparison by profit level

The farms are divided into three equal-sized groups – high profit third, medium profit third, and low profit third.  As shown in Table 2, great disparity exists between the high profit third and the low profit third.  The high profit third maintained a relatively high level of income with $53,346 of accrual net income.  However, the low profit third had a negative $43,802 accrual net income, almost $100,000 less than the high profit third.

Table 2: Farm economic and financial data by profit level -- 1998
 
Profit levels
 
Average
High
Medium
Low
Net income – accrual accounting 
5,973
$53,346
$13,677
-$43,802
Value farm production per $1 expense
$1.08
$1.33
$1.10
$.74
Return on assets 
-2%
6%
-2%
-11%
Return on equity   
-9
7
-9
-20

The high profit third had a 7 percent return on equity while the low profit third had a negative 20 percent return, a 27 point swing.  Stated in a different fashion, the high profit third increased equity by 7 percent while the low profit third lost 20 percent of their equity.

The high profit farms generated $1.33 of farm production for each $1 of farm expense while the low profit farms generated only 74 cents.  Many farms in the low third group were large-scale livestock producers.  Farms in the high third tended to have less livestock and low costs of production.

Economic comparison by type of farm

Considerable variation existed based on the type of farming operation.  As shown in Table 3, hog farrow-to-finish farms were hit the worst while dairy farms flourished.  Accrual net income for hog farms averaged a negative $29,514 while dairy farms averaged a positive $82,571.  Hog farms lost 21 percent of their equity on average while dairy farms gained 10 percent.  Net incomes of beef farms averaged near breakeven or slightly above but lost 8 percent of their equity.  Cash grain farms lost 11 percent of their equity.

Table 3: Farm economic and financial data by type of farm

 

Farrow
to finish
Beef
feeding
Dairy
Cash
grain
Beef
raising
Net income – accrual
- $29,514
- $565
$82,571
$25,654
$7,380
Return on assets
- 7%
- 1%
8%
1%
- 2%
Return on equity
- 21%
- 8%
10%
- 11%
- 8%
Debt to asset ratio
.35
.35
.38
.29
.35

A comparison of 1998 income levels to historic levels by type of farm is shown in Table 4.  Hog farms had a $110,000 drop in average net income from $80,458 in 1997 to a negative $29,514 in 1998.  Dairy farms, however, had an increase in net income of over $40,000 from 1997 to 1998.  The other farm types had substantial drops in income from both 1997 levels and the ten-year average.

Table 4: Net farm income by type of farm compared to historic levels

 

Farrow
to finish
Beef
feeding
Dairy
Cash
grain
Beef
raising
1998
- $29,514
- $565
$82,571
$25,654
$7,380
1997
80,458
55,734
39,874
66,254
48,656
10 year average
50,239
49,183
45,455
44,562
31,300

Return on assets for 1998, as compared to historic levels, is shown in Table 5.  Hog farms had a negative 6.6% return on assets in 1998 as compared to 9.2% in 1997 and a 10-year average of 7.8%.  Except for dairy, the other types of farms also had lower returns in 1998.  However, dairy had an 8.3% return on assets for 1998 compared to 5% in 1997 and an average of 7.6%.

Table 5: Return on assets* by type of farm compared to historic levels

 

Farrow
to finish
Beef
feeding
Dairy
Cash
grain
Beef
raising
1998
-6.6%
-1.0%
8.3%
1.3%
-1.7%
1997
9.2
6.7
5.0
9.3
6.7
10 year average
7.8
5.7
7.6
6.7
4.6

* Owned assets – not rented assets

Outlook for 1999

Most commodity price levels for 1999 are shaping up to be similar to those of 1998.  At these price levels, incomes will remain below average in 1999.  However, accrual income levels and returns on assets and equity may not be as severe as in 1998.  Because beginning and ending commodity inventory values are used in computing accrual net income, the decline in inventory values negatively affects accrual net income.  Even if commodity prices don’t improve in 1999, stable inventory values may improve accrual net income and the ratios that are based on accrual net income (return on assets and return on equity).  Farms that sold down inventories in 1998 to meet cash flow needs will find this to be more difficult in 1999.

Implications

No one knows how long the current farm economic slump will last.  If it were to end now, although painful in the short-term, the long-term effects would be relatively minor except for the hog industry.  However, a protracted slump has the potential to affect the economic and social landscape of rural Iowa.

 

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